Harrisburg University 2012 Audit

ANNUAL FINANCIAL REPORT
JUNE 30, 2012
TABLE OF CONTENTS
Page Independent Auditors Report Financial Statements: Statements of financial position Statements of activities Statements of cash flows Notes to financial statements Schedule of expenditures of federal awards Notes to schedule of expenditures of federal awards Report on internal control over financial reporting and on compliance and other matters based on an audit of financial statements performed in accordance with Government Auditing Standards Independent auditor's report on compliance with requirements that could have a direct and material effect on each major program and on internal control over compliance in accordance with OMB Circular A-133 Schedule of findings and questioned costs Report on status of prior year's compliance findings and internal control weaknesses - major federal programs 1 -2
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INDEPENDENT AUDITORS REPORT
Board of Trustees Harrisburg University of Science and Technology Harrisburg, Pennsylvania We have audited the accompanying statements of financial position of Harrisburg University of Science and Technology as of June 30, 2012 and 2011, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of Harrisburg University of Science and Technologys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harrisburg University of Science and Technology as of June 30, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the University will continue as a going concern. As discussed in Note 12 to the financial statements, the University has suffered significant reductions in net assets over the past several years, has a $ 9.7 million net deficiency in unrestricted-other net assets, and failed to make a required semi-annual debt service payment due September 1, 2012, that raise substantial doubt about its ability to continue as a going concern. Management's plans regarding these matters also are described in Note 12. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In accordance with Government Auditing Standards, we have also issued a report dated March 26, 2013 on our consideration of Harrisburg University of Science and Technologys internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.
804 WAYNE AVENUE P.O. BOX y. CHAMBERSBURG, PENNSYLVANIA 17201 (717) 263-3910 FAX (717) 263-1787 www.sek.com Member American Institute of Certified Public Accountants PKF North American Network Registered with Public Company Accounting Oversight Board

Board of Trustees Harrisburg University of Science and Technology Our audit was conducted for the purpose of forming an opinion on the financial statements of Harrisburg University of Science and Technology taken as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the U.S. Office of Management and Budget Circular A-133, Audit of States, Local Governments, and Non-Profit Organizations, and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.
Chambersburg, Pennsylvania March 26, 2013
804 WAYNE AVENUE P.O. BOX y. CHAMBERSBURG, PENNSYLVANIA 17201 (717) 263-3910 FAX (717) 263-1787 www.sek.com Member American Institute of Certified Public Accountants PKF North American Network Registered with Public Company Accounting Oversight Board
HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY Statements of Financial Position June 30, 2012 and 2011 ASSETS Cash - operating Accounts receivable, less allowance of $ 275,000 for 2012 and $ 150,000 for 2011 Contributions receivable, net Grants receivable Other receivables Prepaid expenses Security deposits Debt issue costs, net of accumulated amortization of $ 92,413 for 2012 and $ 75,483 for 2011 Deferred financing cost, net of accumulated amortization of $ 315 for 2012 and $ -0- for 2011 Bond reserve funds Assets held for sale Property and equipment, net Total Assets LIABILITIES AND NET ASSETS Liabilities Notes payable Accounts payable Accounts payable related to property and equipment Accrued interest Other accrued expenses Accrued expenses - assets held for sale Deposits and deferred revenue Deposits on assets held for sale Bonds payable Total liabilities Net Assets Unrestricted Investment in property and equipment Other 11,085,349 9,720,443) 1,364,906 Temporarily restricted Total net assets Total liabilities and net assets $ 2,389,984 3,754,890 88,259,444 $ 12,625,491 3,691,102) 8,934,389 2,810,483 11,744,872 91,561,270 $ 2012 140,555 315,499 2,155,391 218,827 131,703 197,774 8,825 409,159 18,589 4,826,307 14,764,527 65,072,288 $ 88,259,444 $ $ 2011 1,649,940 219,727 2,640,781 169,702 38,079 175,394 8,825 426,089 0 4,826,194 14,764,527 66,642,012 91,561,270
6,284,954 1,673,804 89,703 1,245,628 370,289 750,038 602,068 14,000,000 59,488,070 84,504,554
3,683,749 489,637 149,666 1,217,600 347,010 0 471,160 14,000,000 59,457,576 79,816,398
The Notes to the Financial Statements are an integral part of these statements. -3-
HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY Statements of Activities Years ended June 30, 2012 and 2011
Unrestricted
REVENUES, GAINS, AND OTHER SUPPORT Educational and general Tuition and fees Less student aid Tuition and fees, net Private gifts, grants, and contributions Governmental grants Interest and dividends Gain (loss) from sale of investments Other sources Total educational and general Auxiliary revenues Net assets released from restrictions Total revenues, gains, and other support EXPENSES Educational and general Instructional Research Academic support Student services Institutional support Total educational and general Auxiliary enterprises Total expenses Change in net assets Net assets at beginning of year Net assets at end of year (
2012 Temporarily Restricted
Total
$ (
6,342,201 1,442,849) 4,899,352 790,045 0 2,881 2,933) 502,522 6,191,867 428,673 3,907,592 10,528,132
0 0 0 800,059 2,687,034 0 0 0 3,487,093 0 3,907,592) 420,499)
$ (
6,342,201 1,442,849) 4,899,352 1,590,104 2,687,034 2,881 2,933) 502,522 9,678,960 428,673 0 10,107,633
( (
4,684,623 982,215 1,112,873 3,195,573 7,467,505 17,442,789 654,826 18,097,615 7,569,483) 8,934,389 1,364,906 (
0 0 0 0 0 0 0 0 420,499) 2,810,483 2,389,984 (
4,684,623 982,215 1,112,873 3,195,573 7,467,505 17,442,789 654,826 18,097,615 7,989,982) 11,744,872 3,754,890
Unrestricted
REVENUES, GAINS, AND OTHER SUPPORT Educational and general Tuition and fees Less student aid Tuition and fees, net Private gifts, grants, and contributions Governmental grants Interest and dividends Gain (loss) from sale of investments Other sources Total educational and general Auxiliary revenues Net assets released from restrictions Total revenues, gains, and other support EXPENSES Educational and general Instructional Research Academic support Student services Institutional support Total educational and general Auxiliary enterprises Total expenses Change in net assets Net assets at beginning of year Net assets at end of year (
2011 Temporarily Restricted
Total
$ (
4,675,479 913,137) 3,762,342 457,399 0 10,262 1,576 195,968 4,427,547 392 10,708,002 15,135,941
0 0 0 370,170 7,799,864 0 0 0 8,170,034 0 10,708,002) 2,537,968)
$ (
4,675,479 913,137) 3,762,342 827,569 7,799,864 10,262 1,576 195,968 12,597,581 392 0 12,597,973
( (
4,101,986 941,385 1,218,640 2,919,864 7,371,367 16,553,242 0 16,553,242 1,417,301) 10,351,690 8,934,389 (
0 0 0 0 0 0 0 0 2,537,968) 5,348,451 2,810,483 (
4,101,986 941,385 1,218,640 2,919,864 7,371,367 16,553,242 0 16,553,242 3,955,269) 15,700,141 11,744,872
HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY Statements of Cash Flows Years ended June 30, 2012 and 2011
2012
Cash flows from operating activities: Change in net assets Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Depreciation and amortization Bond discount amortization Interest expense added to note payable Non-cash contributions Loss (gain) from sale of investments Changes in assets and liabilities: (Increase) decrease in: Accounts receivable Contributions receivable Grants receivable Other receivables Prepaid expenses Security deposits Increase (decrease) in: Accounts payable Accrued interest Accrued expenses Deposits and deferred revenue Net cash provided by (used in) operating activities Cash flows from investing activities: Purchases of property and equipment Decrease (increase) in accounts payable related to property and equipment Proceeds from sale of investments Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from borrowings Repayments of debt principal Debt issuance costs Payments on capital lease Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Summary of cash and cash equivalents Cash - operating Bond reserve funds Supplemental disclosures of cash flows information: Cash paid for interest Non cash investing and financing activities: Accounts payable related to property and equipment converted to note payable $ ( ($ 7,989,982) ($
2011
3,955,269)
2,241,638 30,494 27,485 152,757) 2,933
( (
2,182,465 30,494 0 10,060) 1,576)
( ( ( (
95,772) 485,390 49,125) 93,624) 22,380) 1,284,167 28,028 773,317 130,908
41,942) 752,763 1,235,205 37,184) 32,660 225 45,870 10,916 19,927 43,928 308,422
3,399,280)
654,669) 140,037 49,824
( ( (
278,794) 1,782) 11,636 268,940)
464,808)
( (
4,206,583 1,847,767) 4,000) 0 2,354,816 1,509,272) 6,476,134 4,966,862
( (
4,813,112 3,470,848) 0 2,452) 1,339,812 1,379,294 5,096,840
6,476,134
$ $ $
140,555 4,826,307 4,966,862 3,696,896
$ $ $
1,649,940 4,826,194 6,476,134 3,707,861
200,000
NOTES TO FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Nature of Operations Harrisburg University of Science and Technology (the University) is an independent not-forprofit institution located in Harrisburg, Pennsylvania. The University is the nations only comprehensive university that integrates an affiliated college preparatory high school and a business accelerator. The University academic and research programs in mathematics, science and technology are designed to meet the needs of the region's youth, workforce, and businesses, and to expand, attract, and create economic opportunities in the region. The University admitted its first class of students for the Fall 2005 term. In June 2009, the University was accredited by the Middle States Commission on Higher Education. The Middle States Commission on Higher Education is an institutional agency recognized by the U.S. Secretary of Education and the Council for Higher Education Accreditation. Basis of Accounting These financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. Financial Statement Presentation The University reports information regarding its financial position and activities according to three classes of net assets depending on the existence or nature of any donor restrictions as follows: Permanently restricted Net assets subject to donor-imposed restrictions that are to be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income from these assets. The University had no permanently restricted net assets at June 30, 2012 or 2011. Temporarily restricted Net assets whose use by the University is subject to donorimposed restrictions that can be fulfilled by actions of the University pursuant to those restrictions or that expire by passage of time. Unrestricted Net assets that are not subject to donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are generally reported as decreases in unrestricted net assets. Expirations of donor-imposed stipulations that simultaneously increase one class of net assets and decrease another are reported as reclassifications between the applicable classes of net assets.
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Note 1.
Summary of Significant Accounting Policies (Continued) Contributions Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence or nature of any donor restrictions. Contributions, including unconditional promises to give, are recorded as revenues in the period the promise is made. Conditional promises to give are not recognized until the conditions are met or the pledge payments are received. Contributions of assets other than cash are recorded at their estimated fair value. Contributions to be received after one year (including those under the terms of gift annuities and charitable remainder trusts) are discounted at an appropriate discount rate. Amortization of discounts is recorded as additional contribution revenue in accordance with donor-imposed restrictions, if any, on the contributions. An allowance for uncollectible contributions receivable is provided based upon managements judgment including such factors as prior collection history, type of contribution, and nature of the fundraising activity. The allowance for uncollectible promises to give was $ 17,400 and $ 13,750 at June 30, 2012 and 2011, respectively. Contributions with donor-imposed restrictions are reported as temporarily restricted revenues and are reclassified to unrestricted net assets when an expense is incurred that satisfies the donor-imposed restriction. Contributions restricted for the acquisition of property and equipment are reported as temporarily restricted revenue. Those contributions are reclassified to unrestricted net assets when restrictions have been met. Contributed property and equipment is recorded at fair value at the date of donation. If donors stipulate how long the assets must be used, the contributions are recorded as restricted support. In the absence of such stipulations, contributions of property and equipment are recorded as unrestricted support. Cash and Cash Equivalents Cash and cash equivalents represent demand deposits and other investments (including overnight repurchase agreements) with original maturities of three months or less, that are not held for endowment or other long-term purposes. The University maintains its cash accounts in various financial institutions. A portion of the Universitys cash balance may exceed FDIC insurance coverage at times throughout the year. Management considers this to be a normal business risk. Bond Reserve Funds This represents funds originated from bond proceeds that are set aside for payment of interest and principal on the University Revenue Bonds Series B of 2007 as described in Note 4. These monies are invested in various mutual funds of U. S. Treasury obligations which function like money market accounts, with cost approximating market. The minimum amount required at June 30, 2012 and 2011 is $ 4,826,050.
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Note 1.
Summary of Significant Accounting Policies (Continued) Accounts Receivable It is the Universitys policy to provide an allowance for future losses on uncollectible accounts receivable (primarily student tuition and fees) based on an evaluation of the underlying account balances, the historical collection experience of the University on such balances and other factors which, in managements judgment, require consideration in estimating doubtful accounts. Actual write-offs of uncollectible accounts are done periodically after collection efforts have been unsuccessful. Property and Equipment Property and equipment values represent cost at date of acquisition, or fair value at date of donation in the case of gifts. The University uses a capitalization threshold of $ 2,500. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements Furnishings and equipment Leasehold improvements Computer software Library contents 40 years 5 - 7 years 2 10 years 3 years 10 years
The cost and accumulated depreciation of property sold or retired is removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is recorded in the period of disposal. Deposits and Deferred Revenue Deposits and deferred revenue relates to summer session tuition for the portion of the session occurring after June 30, and fall session tuition received prior to June 30. Debt Issue Costs Costs incurred in obtaining financing are capitalized and amortized using the straight-line method over the lives of the debt. Advertising Expense The University expenses advertising costs as incurred. This expense amounted to $ 35,679 and $ 56,057 for the years ended June 30, 2012 and 2011, respectively. Use of Estimates Management of the University has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Accordingly, actual results could differ from those estimates. Significant estimates that could ultimately result in changes to amounts reflected in these financial statements include allowances for uncollectible accounts, contributions receivable, depreciation of property and equipment, and the present value of long-term contributions receivable. It is at least reasonably possible that a change in estimates could occur in the near term.
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Note 1.
Summary of Significant Accounting Policies (Continued) Concentrations The University received approximately 42% and 68% of its revenues in the form of private gifts, grants, and contributions and governmental grants during the years ended June 30, 2012 and 2011, respectively. Decreases in this funding could have a significant impact on the University. Tax Status Under provisions of the Internal Revenue Code, Section 501 (c)(3), and the applicable tax regulations of Pennsylvania, the University is exempt from taxes on income other than unrelated business income. Since the University had no net unrelated business income during the years ended June 30, 2012 and 2011, no provision for income taxes has been made. Uncertain Tax Positions The University follows the FASB Accounting Standards Codification, which provides guidance on accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of June 30, 2012, the University had no uncertain tax positions that qualify for either recognition or disclosure in the University's financial statements. The University's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the financial statements. No interest and penalties were recorded during the year ended June 30, 2012. Generally, the tax years before 2007 are no longer subject to examination by federal, state or local taxing authorities. Disclosure about Fair Value of Financial Instruments Financial instruments include cash and cash equivalents, receivables and payables. The fair value of cash and cash equivalents is their carrying value and carrying value of receivables and payables approximates their fair value.
Note 2.
Contributions Receivable Contributions receivable, representing donor promises to give, have been discounted to present value assuming their respective terms and a discount rate of 2.27% and 2.72% at June 30, 2012 and 2011, respectively. The unamortized discount on pledges receivable was $ 22,442 and $ 72,502 at June 30, 2012 and 2011, respectively. The discounted pledges are scheduled to be collected as follows:
2012 Unconditional promises expected to be collected in: Less than one year One year to five years Over five years Total unconditional promises to give Allowance for uncollectible promises to give Discount for present value of cash flows Net unconditional promises to give 2011
798,333 1,360,385 36,515 2,195,233 17,400) 22,442)
943,443 1,710,561 73,029 2,727,033 13,750) 72,502)
( (
( (
$ 2,155,391
$ 2,640,781
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Note 3.
Property and Equipment/Deposits on Sale of Property A summary of property and equipment of the University as of June 30 is as follows:
Cost Accumulated Depreciation 2012 Land Buildings and improvements Leasehold improvements Furnishings and equipment Library contents Computer software $ 4,062,768 64,697,939 437,614 3,643,725 147,383 355,202 73,344,631 $ 0 5,638,634 228,181 2,052,832 43,808 308,888 8,272,343 2011 Land Buildings and improvements Leasehold improvements Furnishings and equipment Library contents Computer software Construction in progress $ $ 4,062,768 64,482,117 437,614 3,163,622 140,579 355,202 48,061 72,689,963 $ $ 0 4,022,941 182,487 1,536,227 29,605 276,691 0 6,047,951 $ $ 4,062,768 60,459,176 255,127 1,627,395 110,974 78,511 48,061 66,642,012 $ 4,062,768 59,059,305 209,433 1,590,893 103,575 46,314 65,072,288 Depreciated Cost
Depreciation expense (including amortization expense of assets under capital lease) for the years ended June 30, 2012 and 2011 was $ 2,178,699 and $ 2,165,534, respectively. During the year ended June 30, 2009, the University completed the construction of a new 371,000 square foot Academic Center at 326 Market Street. The total cost of the project, including architect fees, feasibility studies, construction costs, furnishings and equipment, capitalized interest, and other related costs, was $ 80.3 million. This cost includes $ 14,764,527 for the parking facility that is scheduled to be transferred to the Harrisburg Parking Authority (see below) and is reported as assets held for sale on the statements of financial position. Construction in process at June 30, 2011 represented costs for elevator enclosure in the parking garage. Final costs were $ 208,875, of which $ 80,407 were reimbursed by grant funds received in 2012. Agreement of sale of property Harrisburg Parking Authority On January 16, 2007, the University entered into an agreement of sale with the Harrisburg Parking Authority (HPA). The terms of this agreement provide for the sale of seven (7) floors of parking facilities (approximately 392 parking spaces) constructed by the University for HPA. The initial purchase price for the parking facility was $ 14,000,600. According to the agreement of sale, the final purchase price will be determined upon completion of the construction of the parking facility. Change orders affecting the cost of construction, whether an increase or decrease to the total project cost, will enter into the calculation of the final purchase price. Settlement is contingent upon mutual agreement of the final purchase price.
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Note 3.
Property and Equipment/Deposits on Sale of Property (Continued) Under the terms of this agreement, several deposits totaling $ 14 million were paid to the University during 2007 to 2009. These amounts are reported as deposits on sale of property on the statements of financial position. The costs associated with the construction of the parking facilities are shown on the statements of financial position as assets held for sale. Under the terms of the agreement, possession was to be delivered to HPA 30 days after completion of construction of the academic center located at 326 Market Street, issuance of a certificate of occupancy for the academic center by the appropriate governmental authorities, as well as any private approvals, permits, connections or easements, necessary or desirable for HU to complete the academic center. Final easement documents have not been received, therefore the transfer of the property has not yet occurred. On May 29, 2009, HPA and the University entered into an Extension of Limited Parking Lease. This agreement was created to reduce to writing the desire of both HPA and the University to continue to operate in the same manner and in accordance with the terms of the Parking Lease and Option to Purchase entered into by the parties on January 16, 2007. The term of the lease expired on January 31, 2010, however, both parties are operating as if the lease was still in effect. HPA has assumed the operations of the parking facility, and the University began leasing 300 spaces in February 2009. Total lease payments were $ 522,000 and $ 495,000 for the years ended June 30, 2012 and 2011, respectively. In addition, the University accrued an expense of $ 750,038 as of June 30, 2012 related to finalizing this agreement. HPA and the University are currently in litigation regarding the terms of this agreement (see Note 10). Consequently, it is uncertain as to when settlement on the parking facility will occur.
Note 4.
Bonds and Notes Payable Bonds Payable On January 1, 2007, the University obtained financing in the form of two construction loans in the amounts of $ 27,690,000 (University Revenue Bond Series A of 2007) and $ 60,225,000 (University Revenue Bond Series B of 2007) with the Harrisburg Authority (Authority), with Commerce Bank N.A. functioning as Trustee (subsequently changed to UMB Bank) under the Trust Indenture dated January 1, 2007. The proceeds were used to refinance various outstanding loans; to fund the acquisition and construction of the new academic center at 326 Market Street; and to establish certain bond reserve funds. While the scheduled maturity for the Series A bonds was in September 2016, based on the special mandatory redemption provisions, final redemption of the Series A bonds occurred on September 1, 2009. As to the Series B Bonds only, the University has arranged for the issuance of a standby letter of credit (the SLOC) by Metro Bank (formerly Commerce Bank) pursuant to a Reimbursement Agreement dated as of January 1, 2007 (the Reimbursement Agreement) between the University and Metro Bank. On the date of execution and delivery of the Series B Bonds, Metro Bank issued in favor of the Trustee the SLOC in the amount of $ 3,300,000, which may be drawn to pay the debt service on the Series B Bonds as described in the Indenture, as such amounts may from time to time be reduced and reinstated as provided in the SLOC. The SLOC expired on September 1, 2011 and was not renewed. The Series B Bonds mature in 2036, but are subject to scheduled mandatory redemption by the Authority annually beginning on September 1, 2015 and continuing through final redemption on September 1, 2036.
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Note 4.
Bonds and Notes Payable (Continued) Bonds Payable (Continued) The County of Dauphin, Pennsylvania has also issued a limited guaranty of up to $ 1.5 million per year for a period of 10 years to be provided for the payment of a portion of debt service on the Series B Bonds. The period for which the guaranty is in effect begins January 1, 2010 and ends December 31, 2019 (the Guarantee Period), unless terminated earlier due to a Termination Event of the County Guarantee. Under the Guarantee Agreement, the County will make payment of not more than $ 1.5 million toward the amount of annual principal and interest due to the holders of the Series B Bonds if the Authority or the Trustee shall fail to pay, in full, for any year during the Guarantee Period the principal of and interest on the Series B Bonds when the same becomes due and payable. The total maximum aggregate amount of the County Guarantee over the Guarantee Period is $ 15 million, which was reduced to $ 13.5 million at June 30, 2011. On February 29, 2012, the University used the County Guarantee to help make the March 1, 2012 bond interest payment, further reducing the available guarantee funds to $ 12 million at June 30, 2012. See a separate recap of the amounts owed to the County of Dauphin in the "Notes Payable" section of this footnote. The University Revenue Bonds bear interest at a rate of 6.0% for Series B. These bonds are secured by all the assets of the University. For a default of the Series B bonds, the letter of credit from Metro Bank (if renewed) would be used first, followed by the County Guarantee, then the bond reserve funds. Under the terms of the bond agreement and Dauphin County Guarantee Agreement, the University is required to maintain various financial covenants. The University was not in compliance with the liquidity covenant for either of the years ended June 30, 2012 or 2011. As a result, the University could only use Expendable Funds (as defined) in excess of $ 10 million to acquire or construct Capital Additions in either year, and the same restriction applies in the 2012-13 year. The University was also not in compliance in 2012 or 2011 with the rate covenant which became effective on June 30, 2011. As a result, the University was required to request a consultant to make a report and recommendation to the University with respect to tuition, student fees and other charges, and with regard to operations of the University. The University believes it has complied with the limitation on capital additions in both years, and hired a consultant as required for the violation at June 30, 2011. The University is working with the Bond Trustee and Noel-Levitz (a consultant) to fulfill the June 30, 2012 requirements. The balance outstanding for the bonds described above at June 30 is as follows:
2012 University Revenue Bond Series B Less: Underwriter's bond discount $ ( $ 60,225,000 736,930) 59,488,070 $ ( $ 2011 60,225,000 767,424) 59,457,576
Amortization expense on debt issue costs related to the above debt for each of the years ended June 30, 2012 and 2011 was $ 16,931. Amortization of the underwriters bond discount to interest expense (net of amounts capitalized) for each of the years ended June 30, 2012 and 2011 was $ 30,494.
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Note 4.
Bonds and Notes Payable (Continued) Bonds Payable (Continued) Bond principal payments due for the next five years and thereafter are as follows for the years ended June 30:
2013 2014 2015 2016 2017 Thereafter (2017 - 2037) $ 0 0 0 1,250,000 1,325,000 57,650,000 60,225,000
See Note 11 (Subsequent Events) related to subsequent payments required for interest on the bonds. Notes Payable The balance of the Metro Bank SLOC was $ 1,141,485 at June 30, 2010. The University made two additional draws totaling $ 3,613,112 during the year ended June 30, 2011, and after making mandatory monthly payments, the balance was reduced to $ 1,483,749 at June 30, 2011. The University borrowed an additional $ 1,848,971 on the SLOC during the year ended June 30, 2012, and after making mandatory monthly payments, the balance was reduced to $ 1,500,695 at June 30, 2012. The University has no further ability to borrow on this SLOC. During the year ended June 30, 2010, the University borrowed $ 1,000,000 from the County of Dauphin, Pennsylvania at an interest rate of 1.0% and scheduled to mature on December 31, 2010. Amendments to this agreement and a supplemental agreement entered into during the year ended June 30, 2011 extended the maturity date to December 31, 2011. In addition, the University borrowed an additional $ 1.2 million from the County of Dauphin on June 30, 2011 subject to the same interest rate, and also maturing on December 31, 2011. On February 29, 2012, the University borrowed $ 1.5 million from the County of Dauphin under the County Guarantee described above. At that time, the University and the County of Dauphin entered into a promissory note for the entire $ 3.7 million, which effectively reduced the interest rate to 0.5% and extended the repayment terms to December 29, 2019. See Note 11 for subsequent modifications to this $ 3.7 million county debt. On May 29, 2012, the University entered into a $ 300,000 line of credit with Fulton Bank, N.A. at an interest rate equal to the Fulton Bank Prime plus 2.0%, with a floor of no less than 5.25%. Monthly payments of accrued interest are due beginning on July 1, 2012 and continuing on the same day of each month thereafter. All unpaid principal and interest is due at maturity, which is June 30, 2013 according to the most recent amendment to the note agreement dated December 20, 2012. The balance outstanding at June 30, 2012 was $ 300,000. The University borrowed $ 750,000 from a related party at a variable rate (2.4% at June 30, 2010), the balance of which was repaid prior to June 30, 2011. During the year ended June 30, 2012, the University entered into six demand promissory notes with donors to the University ranging in amount from $ 50,000 to $ 200,000 for a total amount borrowed of $ 600,000, of which $ 300,000 was from related parties. Interest on these notes accrues at the rate of 4.25%, and principal and interest is payable on demand each calendar year on December 31, provided that the lender notifies the University prior to November 1 of its election to call the outstanding note. One of the lenders made notice, but has not demanded payment. Five lenders did not make this notification prior to November 1, 2012, thus extending the loans until December 31, 2013.
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Note 4.
Bonds and Notes Payable (Continued) Notes Payable (Continued) During the year ended June 30, 2012, the University entered into a promissory note with a vendor in the amount of $ 200,000. The University has agreed to remit to the borrower grant funds from a Pennsylvania Energy Development Authority Grant expected to be $ 100,000 upon receipt of the grant funds. The remaining balance will be amortized over twelve monthly installments of $ 8,515 at an interest rate of 4.0% per year. The balance on this note at June 30, 2012 was $ 184,259. Note principal payments due for the next five (5) years and thereafter are as follows for the years ended June 30: 2013 2014 2015 2016 2017 Thereafter $ 2,584,954 0 0 0 0 3,700,000 $ 6,284,954
Total interest expense on all debt was $ 3,755,418 and $ 3,749,286 for the years ended June 30, 2012 and 2011, respectively. Note 5. Restricted Net Assets The nature of temporarily restricted net assets at June 30 was as follows:
2012 Contributions receivable to be used for: Scholarships Various operating expenses Grants receivable to be used for: Various operating expenses $ 0 2,155,391 234,593 $ 2,389,984 $ $ 2011 4,000 2,636,781 169,702 2,810,483
Note 6.
Assets Released from Restrictions Net assets released from restrictions consist of the following for the years ended June 30, 2012 and 2011:
2012 Time and Purpose restrictions accomplished Commonwealth of Pennsylvania Redevelopment Assistance Capital Program - facility renovation National Science Foundation - grant related expenses DCED Bio-Tech Grant - grant related expenses Corporation for National and Community Service Grant - grant related expenses State Grant - IAG Other state and federal grants Contributions received on outstanding pledges 2011
$ 1,507,550 532,522 85,000 367,915 74,938 54,218 1,285,449 $ 3,907,592
$ 7,676,438 694,082 89,999 268,597 55,602 250,352 1,672,932 $ 10,708,002
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Note 7.
Government Grants In 2008, the University was approved for a $ 25 million Redevelopment Assistance Capital Program (RACP) reimbursement grant funded through the Commonwealth of Pennsylvania Office of Budget. In 2010, the University received approval for an additional $1.25 million grant. These funds, along with $ 1.4 million remaining from a prior $ 12 million RACP grant, a $ 5.0 million RACP grant approved in July 2011, and a $ 6.0 million RACP grant approved in September 2011 brought the total RACP funding for the combined Harrisburg University and Harrisburg Sci-Tech High project to $ 49.25 million. Revenue from this grant in the years ended June 30, 2012 and 2011 was $ 1,507,550 and $ 6,376,438, respectively. Revenue from the RACP grants applicable to this project recognized prior to 2011 was $ 38,250,000, leaving a balance of $ 3,116,012 in RACP grant funding to be recognized in future periods, contingent upon meeting various matching requirements. The University is the recipient of multi-year grants from the National Science Foundation that provide funding for the Science Education for New Civic Engagements and Responsibilities (SENCER) Project. Revenue of $ 518,529, including a $ 35,864 grant receivable at June 30, 2012 was recognized under this grant for the year ended June 30, 2012. Revenue of $ 737,959, including a $ 49,856 grant receivable at June 30, 2011, was recognized under this grant for the year ended June 30, 2011. A balance of $ 263,285 has been authorized under the terms of this grant and is available for future drawdown as of June 30, 2012. The University is the recipient of various other federal and state government grants. Revenue from these grants in the amounts of $ 685,467, including $ 182,963 in grants receivable at June 30, 2012, was recognized for the year ended June 30, 2012. Revenue of $ 685,467, including grants receivable of $ 119,846 at June 30, 2011, was recognized for the year ended June 30, 2011.
Note 8.
Summary of Expenses Expenses by natural classification for the years ended June 30 were as follows:
2012 Salaries and wages Payroll taxes Employee benefits Travel Supplies and other Technology Marketing Facility management Administration Interest Depreciation and amortization $ 5,001,238 369,100 687,233 274,117 1,460,181 323,771 498,748 1,409,028 2,077,142 3,755,418 2,241,639 $ 2011 4,970,837 369,395 649,943 271,762 644,400 312,055 677,982 997,867 1,727,250 3,749,286 2,182,465
$ 18,097,615
$ 16,553,242
Fundraising expenses totaled approximately $ 510,608 and $ 387,449 for the years ended June 30, 2012 and 2011, respectively.
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Note 9.
Operating Leases Total rents paid under operating leases for facilities (including student housing) and equipment, including the parking facilities detailed in Note 3, were $ 1,127,543 and $ 616,805 for the years ended June 30, 2012 and 2011, respectively. The University had a lease for space in Strawberry Square that was scheduled to expire in January 2017, with a base annual rent of $ 52,200 adjusted each year for changes in the consumer price index. This lease was cancelled in December 2012 by mutual agreement, and the rents for the period from July through December 2012 will be considered contributions from the lessors. The University also has a long-term lease to rent apartments at 355 Market Street from July 1, 2011 to June 30, 2016. The lease will automatically renew until June 30, 2040 unless either party provides 6 months notice not to renew. Rents increase 3% annually. The University is only required to pay for units actually occupied by students. The commitments below assume all units are rented and the lease continues past June 30, 2016. Approximate operating lease commitments on long-term leases for the next five years ending June 30 are as follows:
2013 2014 2015 2016 2017 $ 771,017 794,147 817,972 842,510 867,785
$ 4,093,431
Note 10. Commitments and Contingencies Memorandum of Understanding A memorandum of understanding (MOU) with the Harrisburg School District was executed on October 12, 2006 under which the University agrees to provide fully funded scholarships to each graduate of the SciTech High program attending the University, as long as the graduates agree to remain Harrisburg residents for five years after graduation from the University and attain sufficient academic grades as identified in the agreement. Litigation The Harrisburg Parking Authority has filed a Complaint against the University seeking performance of the purchase agreement under which ownership of the parking facility constructed by the University be transferred to HPA (see Note 3) along with a subsidy payment of $ 778,919. The University has filed a Counterclaim against HPA for breach of contract and payment of $ 723,026 for Change Orders that HPA owes under the purchase agreement. The University is vigorously defending the claims, and the outcome cannot be predicted with any degree of certainty. The parties are engaged in informal settlement discussions. The University is involved with various lawsuits in the normal course of operations. Management cannot predict the outcome of the lawsuits or estimate the amount of any loss than may result. However, management believes that losses resulting from these matters, if any, would not have material effect on the financial position of the University.
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Note 10. Commitments and Contingencies Financial Responsibility 34 CFR 668 addresses the requirements for the University to be considered "financially responsible" in order to continue to participate in Title IV Federal Student Aid. 34 CFR 668.171 indicates that "an institution is not current in its debt payments if it is in violation of any existing loan agreement at its fiscal year end, as disclosed in a note to its audited financial statements". The University has contacted the U.S. Department of Education and submitted monthly financial statements to the Department, which to date have been satisfactory to the Department. Continued participation in Title IV Federal Student Aid is subject to ongoing approval by the U. S. Department of Education. Note 11. Subsequent Events The University has evaluated events and transactions subsequent June 30, 2012 through March 26, 2013, the date these financial statements were available to be issued. Based on the definitions and requirements of generally accepted accounting principles, management has identified several events that have occurred subsequent to June 30, 2012 and through March 26, 2013 which require recognition or disclosure in the financial statements. a) On July 2, 2012, United States Environmental Protection Agency awarded the University a grant of $ 150,000. This grant will provide sub awards to 4 year, 2 year and tribal undergraduate institutions in Region 5 and New York that are associated with a Great Lakes Innovative Stewardship Through Education Network (GLISTEN) collaborative cluster. b) In August 2012, the University opened its second student housing complex. This complex, known as Market View Place (MVP), is located within one block of the University. Using state of the art technology, residents of MVP can access the Universitys network which provides a seamless transition from the dorms to the classroom. MVP is owned by a private developer. Even though the University has exclusive rights to the use of the student housing buildings, the University is only responsible to pay for the units it occupies. c) On August 29, 2012, the University received contribution in the amount of $ 657,500 from a local business. This donation served to satisfy a contribution receivable of $ 489,287 and provided a new unrestricted donation in the amount of $ 168,213. d) Section 4.2 of the Loan Agreement (see Note 4) provides that the University is required to make, as Loan Payments, payments which correspond, as to amounts and due dates, to the Bond Debt Service, at least seventy-five (75) business days (or earlier if required by the Indenture) prior to the date when such principal, premium, if any, and interest is due and payable. By Notices of Default dated August 3, 2012 and December 3, 2012, the Trustee notified the University of its failure to make the required Loan Payment, in anticipation of the Bonds Debt Service payment due on September 1, 2012 and March 1, 2013, respectively. The amount due on both September 1, 2012 and March 1, 2013 equals $ 1,806,750. In its Notices of Default, the Trustee asserted that such failure constitutes an Event of Default under the Loan Agreement and under the Indenture. As of September 1, 2012, the University failed to make the required bond debt service payment on the University Revenue Bonds, Series B of 2007 in the amount of $ 1,806,750. The University is currently working with the Bond Trustee to establish a repayment schedule for the missed payment. As of the date of these statements, the University has not made any payments towards this debt service requirement due September 1, 2012. See (j) for additional information related to the March 1, 2013 interest payments.
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Note 11. Subsequent Events (Continued) e) On September 12, 2012, the National Science Foundation awarded the University a grant of $ 377,532 for support of the project entitled Shaping an Infrastructure for the Partnership of Informal Science Education and Higher Education. This award is effective September 15, 2012 and expires on August 31, 2015. This is a continuing grant which has been approved on scientific / technical merit. Contingent on the availability of funds and the scientific progress of the project, the National Science Foundation expects to continue support at approximately $ 340,820 and $ 393,758 for FY 2014 and FY 2015, respectively. f) On September 26, 2012, the National Science Foundation awarded the University a grant of $ 960,030 for support of the project entitled Science Education for New Civic Engagement and Responsibilities. This award is effective October 1, 2012 and expires on September 30, 2016. This is a continuing grant which has been approved on scientific / technical merit. Contingent on the availability of funds and the scientific progress of the project, the National Science Foundation expects to continue support at approximately $ 900,065, $ 893,176, and $ 746,542 for FY 2014, FY 2015, and FY 2016, respectively. g) On July 16, 2012 and December 12, 2012 the University received $ 250,000 and $ 500,000, respectively from The Donald B. and Dorothy L. Stabler Foundation. These payments represent installments under a grant received in December 2011, and fulfill the grant commitment from The Donald B. and Dorothy L. Stabler Foundation. h) At its session on January 2, 2013, the Executive Committee for Substantive Change of the Middle States Commission of Higher Education acted to acknowledge receipt of the substantive change request to provisionally include the additional location at 111 South Independence Mall East, Philadelphia, PA, within the scope of the Universitys accreditation, pending a site visit within six months commencing operations. In addition, the Executive Committee for Substantive Change of the Middle States Commission of Higher Education acted to acknowledge receipt of the substantive change request to include the online Master of Science in Learning Technologies program within the scope of the Universitys accreditation. i) On February 5, 2013, the United States Department of Educations Federal Student Aid School Eligibility Channel School Participation Team issued an Approval Notice which grants approval for the additional location at 111 South Independence Mall East, Philadelphia, PA. This approval grants the University to offer Title IV funding to eligible students at the Philadelphia location. On February 28, 2013, the University used the County Guarantee in the amount of $ 1,500,000 as described in Note 4. These funds along with $ 306,750 of University funds, were used to make the bond debt service payment on the University Revenue Bonds, Series B of 2007 due March 1, 2013. As of March 12, 2013, the University owes the County of Dauphin $ 5.2 million.
j)
Note 12. Sustainability of Harrisburg University - Going Concern Contingency Over the course of the past six (6) years the University has had a net outflow of cash of approximately $ 22.2 million from operating activities. This use of financial resources was anticipated by management over this time period. Over the past several years, both senior management and the Board of Trustees for the University have focused on revenue generation and expense reduction initiatives while fulfilling the underlying mission of the University.
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Note 12. Sustainability of Harrisburg University - Going Concern Contingency (Continued) Looking ahead, key components of the Universitys ability to become sustainable include the following: In February, 2013, University contracted with Noel-Levitz for a two (2) year engagement to focus on student recruitment and marketing efforts. This engagement is designed to increase enrollments and retention and to focus on University marketing and branding efforts, The University is currently working on tuition pricing models to better resemble those of its peers and competitor institutions, Focusing on external contributions from donors, Maximizing the dollars of federal, state and local grants to the university, Formation of partnerships to deploy University offerings on-line, Creation of additional market-driven academic degrees and concentrations, Constant review and control of all University expenditures, Securing of a line of credit to smooth out cash flows, Providing student housing options for all students.
While many of the above items have been the focus for the past several years, it is important to note that since then the University has achieved several accomplishments which have led to revenue generation or expense reductions and is providing a pathway for continued sustainability of the University. For example, in August 2012, the University opened its second student housing complex. This complex, knows as Market View Place (MVP), is located within one block of the University. In August 2013, the University is scheduled to open its third student housing complex. This complex is directly across the street from the University. Using state of the art technology, residents of all three student housing complexes can access the Universitys network which provides a seamless transition from the dorms to the classroom. Having student housing has increased the Universitys ability to attract and retain students. Each of the student housing buildings are owned by a private developer. Even though the University has exclusive rights to the use of the student housing buildings, the University is only responsible to pay for the units it occupies. In addition, since year-end, the University has been awarded a federal grant from the United States Environmental Protection Agency in the amount of $150,000 and two federal grants from the National Science Foundation (NSF). The NSF grants provide potential funding in the amount of $ 1,337,562 for the initial grant year. For FY 2014, 2015, and 2016, the NSF grants have potential funding amounts of $ 1,240,885, $ 1,286,934 and $ 746,542, respectively. Over the past year the University has developed more offering for its students. These include four concentrations, two certificates programs and three degree programs. The new concentrations include: 1) Environmental Impact of Pharmaceuticals, 2) Pharmaceutical Design, 3) Environmental Science and Renewal Energy and 4) Interactive Media Management. The new certificate programs are Certified Government Chief Information Officer and Information Technology Project Management. The new degree programs include: 1) Bachelor of Science Data Analytics, 2) Masters of Science Data Analytics and 3) bachelor of Science/Masters of Science Data Analytics in a 5 year accelerated program.
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Note 12. Sustainability of Harrisburg University - Going Concern Contingency (Continued) In December 2011, the University opened the Government Technology Institute (GTI). The GTI provides a pathway for public sector information technology workers to attain certification in their ever-growing field. Through the GTI, a Certified Government Chief Information Officer program is offered directly to state employees. This course is strongly supported by Pennsylvanias Chief Information Officer and the Governors office. Since its inception, GTI has had 24 graduates and there are currently 24 students enrolled. In March 2013, the University is scheduled to offer a beginning Information Managers course which was targeted at state officials below the CIO level. This course was oversubscribed by 30 students. Further, building off the four (4) founding members: CISCO, Unisys, Microsoft and CA Technologies, the GTI has added two (2) additional members, Deloitte and Computer Aid Inc. The University is currently working to add two (2) of the nations top cable providers over the next few months. Finally, the University has submitted a White Paper document to the Governors Innovation Office recommending the creation of a computer/network lab at the University to be used by all state agencies. This computer lab is strongly supported by CISCO. Focusing on student recruitment efforts the University welcomed 136 and 92 first-time, fulltime freshmen to the University in Fall 2012 and 2011, respectively. With the use of consultants Noel-Levitz and Royall & Company, the University is currently striving to add 180 plus first-time, full-time freshmen to the University in Fall 2013. Since year end, the University has gained approval from the Middle States Commission on Higher Education for two (2) substantive changes. The first substantive change was required for the University to completely offer degrees in Learning Technology online. This change provides the University the ability to market this degree across the entire nation. The second substantive change was received In January 2013. With this, the University has approval to operate an additional location in Philadelphia, PA. The University will offer its first slate of courses in the summer of 2013 in partnership with the Hussian School of Art. The University will co-locate with Hussian at its Philadelphia location. Initially, the University will offer its existing B.S. degree program in new media and its existing M.S. degree program in learning technologies in Philadelphia. In Spring 2014, the University and Hussian plan to offer a new joint bachelors degree program in interactive art and media. The new degree program will be offered by the University, but will be delivered by both University and Hussian faculty. The University has received approval from the United States Department of Education to offer Title IV funding for students at the Philadelphia location. Harrisburg University (HU) is in the process of creating a partnership to market and deliver bachelors and masters degree programs in data analytics to a national audience. In the past 9 months, HU has developed the data analytics programs to address growing demand in the healthcare, manufacturing, transportation, energy and telecommunications industries for employees skilled in building large data sets and using analytic tools to make critical business decisions. HU has limited resources for delivering these programs beyond the reach of its current marketing and student recruiting activities. Yet, the data analytics programs have significant appeal in multiple industries across the nation. The University continues to encounter significant cash flow issues. The University must continue to focus on several key areas in order to continue fulfilling the mission of the University. These areas of focus include: expense control and reduction, student recruiting and retention and revenue generation. First, under expense control, the University has negotiated payment terms for most of its vendors which better enables the University to maintain positive cash balances. Also, the University has entered into an agreement with a local business which will reduce the cost of security and cleaning approximately $ 7,000 to $ 8,000 per month. Also, In January 2013, the University switched their payroll processing company, which is
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Note 12. Sustainability of Harrisburg University - Going Concern Contingency (Continued) estimated to save nearly $ 40,000 per year. Second, with the use of Noel-Levitz and Royall and Company, the University will focus on soliciting the names of students who have the desire and capacity to succeed at the University. The Universitys admission staff will undergo extensive training on how to sell the University offerings and how to get prospective students to commit to the University. Third, using partnerships with local employers to design educational courses and degrees will continue to be a driving force in creating a market driven approach to academics. The University will also continue to partner with external entities to enable the delivery of courses to students throughout the country with minimal cash outflows. Recognizing that cost reductions and current year growth trends cannot mitigate all of the Universitys cash flow needs, the University continues to pursue several major initiatives. First, the University is currently working with the University Bond Holders to negotiate repayment of amounts previously due but unpaid under the bond documents. Second, the University is working with the local area economic development agency to facilitate a bankbacked loan which will serve as a line of credit for the University. This credit facility is subject to Bond Holder approval. Preliminary discussions of the credit facility contain an interest only period for the first three years and then amortization over a five to seven year period. Third, the University plans to have a Director of Major Gifts under contract beginning in early March 2013. This position will serve to generate and secure major gift proposals, Pennsylvania government relations aimed at the Governors office and the PA Department of Community and Economic Development and federal government relations. Fourth, the University is currently in negotiations with Metro Bank to restructure its current loan obligation. Under the pending request, the outstanding obligation would convert to a three year interest only period. After the three year period, the University is proposing amortizing the remaining outstanding balance over five years. This proposal would reduce the Universitys monthly payment by approximately $ 22,000 per month. All of these initiatives are contingent on cooperation from the Trustee and Bond Holders to waive their rights currently available under the terms of the bond agreement and related Trust Indenture, as well as the ability to continue participation in the Title IV Student Assistance Program (see Note 10 to the financial statements as well as Note 6 of the "Notes to Schedule of Expenditures of Federal Awards" on page 23 of this financial report).
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HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY Schedule of Expenditures of Federal Awards Year Ended June 30, 2012
Federal CFDA U.S. Department of Education Student Financial Aid Cluster: Federal Supplemental Educational Opportunity Grants Federal Work Study Pell Grant Program Federal Direct Student Loans Total Student Financial Aid Cluster Corporation for National and Community Service Learn and Serve America - Higher Education National Science Foundation PA STEM-UP University Partnership for the Advancement of Academic Women (Subrecipient from Shippensburg University, Agreement No. 4300000657) Course Curriculum and Laboratory Improvement Program Total Federal Assistance Revenues Expenditures/
Grant Period
84.007 84.033 84.063 84.268
07/01/11 06/30/12 07/01/11 06/30/12 07/01/11 06/30/12 07/01/11 06/30/12
11,193 9,946 553,341 2,228,311 2,802,791
(Note 4)
94.005
07/01/11 06/30/12
368,239
(Note 5)
47.076
11/1/11 - 8/31/15
23,216
47.076
07/01/11 06/30/12 $
518,529 3,712,775
See accompanying notes to Schedule of Expenditures of Federal Awards.
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NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
Note 1.
General The accompanying schedule of federal awards presents the expenditures of federal awards programs of Harrisburg University of Science and Technology (the University). The University is described in Note 1 to the Universitys financial statements.
Note 2.
Basis of Accounting The accompanying schedule of federal awards is presented using the accrual basis of accounting, which is described in Note 1 to the Universitys financial statements.
Note 3.
Relationship to Financial Statements Amounts reported in the accompanying schedule agree with amounts included in the Universitys financial statements in all material respects.
Note 4.
Federal Direct Student Loans The University is only responsible for the performance of certain administrative duties and is not considered the lender with respect to the student loan programs, and accordingly, these loans are not included in its financial statements and it is not practical to determine the balance of loans outstanding to students and former students of the University under these programs.
Note 5.
Subrecipients Payments to subrecipients during the year ended June 30, 2012 from the Corporation for National and Community Service Grant, CFDA #94.005, were $ 245,825.
Note 6.
Financial Responsibility The Universitys Equity, Primary Reserve, and Net Income ratios for the year ended June 30, 2012 yield a composite score of (0.5) out of a possible 3.0 as described in 34 C.F.R. 668.172, Financial Ratios. Accordingly, the University has not achieved the minimum score of 1.5 and does not meet the requirement of the financial standards for this period. As a result of composite scores less than 1.5 for fiscal years ended June 30, 2010 and 2011, the University has been subject to zone alternative disbursement requirements for the past two years. The zone alternative is only available if the composite score is in the range from 1.0 to 1.4. Therefore, the University may be required to comply with other alternative standards such as an irrevocable letter of credit in order to remain eligible to participate. In addition, as noted in Note 4 to the financial statements, the University was not in compliance with certain debt covenants at June 30, 2012 or June 30, 2011. The University has responded as needed to the restrictions and actions necessary as a result of not meeting the covenants. 34 CFR 668.171 indicates that "an institution is not current in its debt payments if it is in violation of any existing loan agreement at its fiscal year end, as disclosed in a note to its audited financial statements". The University contacted the U.S. Department of Education on July 14, 2011 and again on January 26, 2013 to make the Department aware of its covenant noncompliance, and plans to work with the Department to assure that the University continues to be eligible to participate in the Title IV Student Assistance Program.
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REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Trustees Harrisburg University of Science and Technology Harrisburg, Pennsylvania We have audited the financial statements of Harrisburg University of Science and Technology (a nonprofit organization) as of and for the year ended June 30, 2012, and have issued our report thereon dated March 26, 2013, which was qualified due to a going concern uncertainty. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of Harrisburg University of Science and Technology is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered Harrisburg University of Science and Technologys internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Harrisburg University of Science and Technologys internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of Harrisburg University of Science and Technologys internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entitys financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether Harrisburg University of Science and Technologys financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
- 24 804 WAYNE AVENUE P.O. BOX y. CHAMBERSBURG, PENNSYLVANIA 17201 (717) 263-3910 FAX (717) 263-1787 www.sek.com Member American Institute of Certified Public Accountants PKF North American Network Registered with Public Company Accounting Oversight Board

Board of Trustees Harrisburg University of Science and Technology
We noted certain matters that we reported to management of Harrisburg University of Science and Technology in a separate letter dated March 26, 2013. This report is intended solely for the information and use of the board of trustees, management, and federal awarding agencies and pass-through entities, and is not intended to be and should not be used by anyone other than these specified parties.

INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133
Board of Trustees Harrisburg University of Science and Technology Harrisburg, Pennsylvania Compliance We have audited Harrisburg University of Science and Technologys compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of Harrisburg University of Science and Technologys major federal programs for the year ended June 30, 2012. Harrisburg University of Science and Technologys major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of Harrisburg University of Science and Technologys management. Our responsibility is to express an opinion on Harrisburg University of Science and Technologys compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Harrisburg University of Science and Technologys compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of Harrisburg University of Science and Technologys compliance with those requirements. As described in item 2012-1 in the accompanying schedule of findings and questioned costs, Harrisburg University of Science and Technology did not comply with requirements regarding financial responsibility that are applicable to its Student Financial Aid Cluster. Compliance with such requirements is necessary, in our opinion, for Harrisburg University of Science and Technology to comply with the requirements applicable to that program. In our opinion, except for the noncompliance described in the preceding paragraph, Harrisburg University of Science and Technology complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2012.

To the Board of Trustees of Harrisburg University of Science and Technology
Internal Control Over Compliance Management of Harrisburg University of Science and Technology is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered Harrisburg University of Science and Technologys internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Harrisburg University of Science and Technologys internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. Harrisburg University of Science and Technology's response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. We did not audit Harrisburg University of Science and Technology's response and, accordingly, we express no opinion on the response. The purpose of this report is solely to describe the scope of our testing of compliance with the types of compliance requirements to each of Harrisburg University of Science and Technology's major programs and our testing of internal control over compliance and the results of our testing, and to provide an opinion on Harrisburg University of Science and Technology's compliance but not to provide an opinion on the effectiveness of Harrisburg University of Science and Technology's internal control over compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Harrisburg University of Science and Technology's compliance with requirements applicable to each major program and its internal control over compliance. Accordingly, this report is not suitable for any other purpose.

HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY SCHEDULE OF FINDINGS AND QUESTIONED COSTS For the Year Ended June 30, 2012
A. Summary of Auditors Results: Financial Statements: (i) Type of auditors report issued: (ii) Internal control over financial reporting: Material weakness(es) identified? Significant deficiencies identified not considered to be material weaknesses?
Unqualified
yes yes yes
X X X
no None reported no
(iii) Noncompliance material to financial statements noted? Federal Awards: (iv) Internal control over major programs: Material weakness(es) identified? Significant deficiencies identified that are not considered to be material weaknesses? (v) Type of auditors report issued on compliance for major programs:
yes yes
X X
no None reported
Qualified
(vi) Any audit findings disclosed that are required to be reported in accordance with Circular A-133, Section .510(a) (vii) Identification of major programs: CFDA Number(s)
yes
no
Name of Federal Program or Cluster Title IV Student Financial Aid Cluster: FSEOG Program FWS Program Pell Grant Program Federal Direct Student Loans Corporation for National and Community Service
84.007 84.033 84.063 84.268 94.005 (viii)
Dollar threshold used to distinguish between Type A and Type B programs:
$ 300,000 yes X no
(ix) Auditee qualified as low-risk auditee?
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HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the Year Ended June 30, 2012 B. Findings - Financial Statements Audit None C. Findings and Questioned Costs - Major Federal Award Programs Audit Finding 2012-1: In order to participate in the Title IV Student Financial Assistance programs, an institution must meet specific standards of financial responsibility as defined in the Code of Federal Regulations (CFR) Part 668. One of these standards under Section 668.171 is to maintain a composite score of at least 1.5 out of a possible 3.0 for the combination of Equity, Primary Reserve, and Net Income ratios, as defined in the CFR. The Universitys scores for the years ended June 30, 2012, 2011 and 2010 were (0.5), 1.2 and 1.4, respectively. As a result of not maintaining the minimum score, the University is required to comply with the conditions of the Zone Alternative, which the University has done. Another general standard under Section 668.171 is that the institution remain current in its debt payments. While the University has made all required debt payments on time through the fiscal year ended June 30, 2012, the CFR states that an institution is not current in its debt payments if it is in violation of any existing loan agreement at its fiscal year end, as disclosed in a note to its audited financial statements or audit opinion. Note 4 of the Universitys audited financial statements for the fiscal year ended June 30, 2012 includes a disclosure that the University is not in compliance with the Rate Covenant or the Liquidity Covenant for its Bonds Payable. In addition, the University did not make its required interest payment of $1,806,750 that was due on September 1, 2012. The University contacted the Department of Education in July and again in January 2013 to make the Department aware of this issue and will need to work with the Department to assure that the University continues to be eligible to participate in the Title IV Student Assistance Program. There are no questioned costs as a result of this finding. Auditee Response: The University contacted the Department of Education regarding our composite score. The audited financial statements will be submitted to the Department of Education by the March 31, 2013 deadline. Once reviewed, the Department of Education will provide HU with guidance relating to the University's participation in the Title IV program. Harrisburg University understands the rules surrounding the regulation and will comply with the Department's determination.
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HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY REPORT ON STATUS OF PRIOR YEARS COMPLIANCE FINDINGS AND INTERNAL CONTROL WEAKNESSES MAJOR FEDERAL PROGRAMS Year Ended June 30, 2012
2011-1 Condition: The University did not comply with minimum standards of financial responsibility as defined in CFR 668.171 to maintain a minimum composite score of at least 1.5 out of a possible 3.0 for the combination of Equity, Primary Reserve, and Net Income ratios. The Universitys score for the year ended June 30, 2011 was 1.2. In addition, the University did not comply with the general standard under Section 668.171 that the institution remains current in its debt payments due to noncompliance with the Rate Covenant and the Liquidity Covenant for its Bonds Payable. Status: The University complied with the Department of Education requirement to participate in the Zone Alternative program as defined in its letter to the University dated June 8, 2012. As of June 30, 2012, the condition noted above still exists. Refer to the schedule of findings and questioned costs.
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Harrisburg University 2012 Audit

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Harrisburg University 2012 Audit

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ANNUAL FINANCIAL REPORT

JUNE 30, 2012

6rnilh Ellioll Kearns (]5 Company. LLC

INDEPENDENT AUDITORS REPORT

6rnilh Ellioll Kearns (]5 Company. LLC

Chambersburg, Pennsylvania March 26, 2013

3,683,749 489,637 149,666 1,217,600 347,010 0 471,160 14,000,000 59,457,576 79,816,398

2012 Temporarily Restricted

0 0 0 800,059 2,687,034 0 0 0 3,487,093 0 3,907,592) 420,499)

0 0 0 0 0 0 0 0 420,499) 2,810,483 2,389,984 (

2011 Temporarily Restricted

0 0 0 370,170 7,799,864 0 0 0 8,170,034 0 10,708,002) 2,537,968)

0 0 0 0 0 0 0 0 2,537,968) 5,348,451 2,810,483 (

2,241,638 30,494 27,485 152,757) 2,933

2,182,465 30,494 0 10,060) 1,576)

95,772) 485,390 49,125) 93,624) 22,380) 1,284,167 28,028 773,317 130,908

654,669) 140,037 49,824

278,794) 1,782) 11,636 268,940)

4,206,583 1,847,767) 4,000) 0 2,354,816 1,509,272) 6,476,134 4,966,862

4,813,112 3,470,848) 0 2,452) 1,339,812 1,379,294 5,096,840

140,555 4,826,307 4,966,862 3,696,896

1,649,940 4,826,194 6,476,134 3,707,861

798,333 1,360,385 36,515 2,195,233 17,400) 22,442)

943,443 1,710,561 73,029 2,727,033 13,750) 72,502)

$ 1,507,550 532,522 85,000 367,915 74,938 54,218 1,285,449 $ 3,907,592

$ 7,676,438 694,082 89,999 268,597 55,602 250,352 1,672,932 $ 10,708,002

84.007 84.033 84.063 84.268

07/01/11 06/30/12 07/01/11 06/30/12 07/01/11 06/30/12 07/01/11 06/30/12

11,193 9,946 553,341 2,228,311 2,802,791

See accompanying notes to Schedule of Expenditures of Federal Awards.

NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS

6rnilh Ellioll Kearns (]5 Company. LLC

6rnilh Ellioll Kearns (]5 Company. LLC

Board of Trustees Harrisburg University of Science and Technology

Chambersburg, Pennsylvania March 26, 2013

6rnilh Ellioll Kearns (]5 Company. LLC

6rnilh Ellioll Kearns (]5 Company. LLC

To the Board of Trustees of Harrisburg University of Science and Technology

Chambersburg, Pennsylvania March 26, 2013

yes yes yes

84.007 84.033 84.063 84.268 94.005 (viii)

Dollar threshold used to distinguish between Type A and Type B programs:

(ix) Auditee qualified as low-risk auditee?

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